UK Services PMI at 52.6

The UK Markit/CIPS PMI services-sector index fell lower to 52.6 for the month of September after it recorded a value of 52.9 in the previous month. This comes in the wake of the huge increase it staged in the August release and was slightly above the consensus forecast of 52.2.

New business rose at the fastest pace since February, although it was still below the longer-term average, with overseas client orders boosted by Sterling weakness. There was also a recovery in confidence following the initial UK referendum shock. In this context, outstanding business levels rose for the second successive month. The third-quarter reading was the weakest since the fourth quarter of 2012 and underlying worries over the outlook will persist as the Brexit uncertainty continues.

The PMIs however now imply that British businesses are now shrugging off the initial shock of the Brexit vote, as they appear to be returning to their pre Brexit levels. As Chris Williamson, Chief Business Economist at IHS Markit notes, "The survey results suggest that the economy has regained modest growth momentum since the EU referendum, with further service sector expansion accompanied by a return to growth in construction and an especially strong revival of manufacturing. Across the three sectors, the pace of economic growth signalled was the strongest since January, fuelling greater job creation as companies shrugged off short-term Brexit worries and enjoyed the benefits of a weaker currency."

We have already witnessed some very positive readings come from the manufacturing and construction sectors this week, so the anticipation for a good reading is high.

There are however questions over whether the GBP will be affected by the data anymore; this could explain why even though the currency is off recent lows, it is hardly climbing  higher. Both the construction and manufacturing numbers were ignored with the Euro, Dollar and host of other currencies hitting fresh multi-year highs.

“Despite additional upbeat UK survey data, GBP is firmly on the back foot, as the market responds to the higher likelihood of a “hard” Brexit. GBP/USD broke through key long-term support at 1.2798, extending beyond support at 1.2720,” says analyst Robin Wilkin at Lloyds Bank.

Wilkin observes an interesting discrepancy in markets right now, which begs the question - is the prevailing sentiment more important than data?

“On the evidence of GBP over the last week, absolutely. Since mid-September, the correlation between the changes in the UK Citi Surprise Index and GBPUSD has fallen from +0.62 to -0.13, highlighting the extent to which the market is selling GBP despite the continued outperformance of domestic data,” says Wilkin.

The services numbers complete a trio of pretty solid PMI readings over the past week. Over the last couple of days, both the manufacturing and construction sectors came in substantially higher than had been expected, suggesting once again that the early uncertainty after the Brexit vote has now almost completely worn off.